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January 25, 2013

Gundlach, El-Erian Weigh In: What’s Behind Apple’s Fall?

Jeff Gundlach calls tech giant a ‘broken company that’s over-owned’

An iPhone memorial to Steve Jobs in 2011. (Photo: AP)

If Apple can’t get it right, what chance do the rest of us have with succession planning?

At FSI’s OneVoice Conference in Orlando in January 2012, author and business consultant Simon Sinek gave Apple five years before it would lose its position as the most innovative company of the modern era. The reason, Sinek argued, was that the creative founder of a company almost always cedes control to an operational person.

“If you think about it, it makes sense,” he explained. “Creative and operational are complementary skillsets, so the founder would naturally think the other person would be a great fit because ‘we work so well together.’ But operational people, by definition, aren’t visionaries, and have trouble looking long-term.”

Like Wal-Mart and Microsoft, whose founders were succeeded by operations executives, so too was Apple with Tim Cook taking over when Steve Jobs died in 2011. Apple’s decline will commence once the pipeline of product initiatives begun by Steve Jobs is exhausted, Sinek concluded, a timeline he put at the aforementioned five years.

Are we already starting to see the fall?

Apple Inc. (AAPL) saw its share price decrease sharply on Thursday, even as the S&P 500 hit 1,500. The tech giant, despite its position as a major component of the broad market index, experienced a 10% drop on investor skepticism over its prospects for growth despite its record earnings.

The Dow and S&P 500 hit 5-year highs on Thursday following mostly upbeat corporate results and economic data, but the NASDAQ lagged as shares of Apple plunged.

"I think this is really a broken company that is over-owned," DoubleLine CEO Jeff Gundlach (left) said in typically blunt fashion on CNBC on Wednesday.

The star fixed-income fund manager added that Apple stock could be headed to a level of $425 per share this quarter.

PIMCO’s Mohamed El-Erian (right) joined Gundlach is his outlook, though more diplomatically.

“The basic question is the extent to which the sharp fall—down over 10% early this morning and 35% overall since the end of September—is warranted by growing concerns about the ability of the company to maintain rapid growth in the context of increasing competition and an uncertain product cycle,” El-Erian wrote in a guest blog for the network on Thursday.

What is less well analyzed, he says, is the extent to which the rest of markets as a whole have decoupled from Apple.

“Apple's sharp fall since September has been accompanied by an across the board rise in major indices; from 1% for the NASDAQ to 4% for the Dow Jones Industrial and 5% for the S&P 500.”

El-Erian then lists three possible reasons for this “large and largely unexpected divergence:”

“With its mystique and ability to deliver what Guy Kawaski called "enchantment," Apple lives in its own microcosm. As such, it is natural for its share price to behave very differently from other companies—and especially so when macro policy and political factors are playing such a large role.”

“Alternatively, Apple's loss is someone else's gain. Accordingly, the decoupling is an indication of a healthy market rotation, underpinned by solid consumer demand and dynamic product innovation for the industry as a whole.”

“Finally, it could also be that investors are subject to sequential reactions, as opposed to simultaneous ones. Here, Apple's fall could potentially affect other stocks adversely through two channels: the weak and temporary one, where investors sell other stocks in order to buy Apple at a lower price; or the more durable and meaningful one involving a generalized increase in risk aversion.”

“Interestingly, I suspect that the dynamic determining the dominance of one or more of these three factors will come from outside,” he concludes, "namely, central banks' willingness and ability to continue to artificially support financial: The greater central banks' effectiveness in raising asset prices and delivering economic outcomes, the more likely that markets as a whole will escape negative contagion from Apple.”